Royal Mail Accelerates Privatization Timeline

NEW YORK (TheStreet) -- A couple of months ago the UK government announced its intention to privatize the Royal Mail through a public stock offering as soon as April 2014. Spearheaded by Business Secretary Vince Cable however the timeline for a stock flotation has accelerated and could be as soon as the middle of next month. A formal announcement today would be the kick-off to starting the process.

As noted when this story first broke this is a very controversial step if it actually happens. Under former Prime Minister Margaret Thatcher there were numerous such privatizations of national assets but she felt the Royal Mail should not be privatized.

There are two large objections to the privatization. The first is on the part of postal employees who worry about cuts to pay and benefits and a possible reduction in the number of employees. Current pensioners will be safe because the UK government absorbed Royal Mail's pension obligations in 2009 but new management will have an obligation to shareholders to cut costs where possible and be hard bargainers for any expenditure including employees.

Sensitive to these concerns the government is trying to create a sense of ownership for employees by offering a 10% stake to postal workers which the Financial Times reckons to be 2,000 British pounds per employee based on a 3 billion British pounds market cap.

The other big objection is whether a private Royal Mail will adhere to the same "universal service obligation" which was actually legislated in 2011. On the table for change, post-privatization, are deliveries six days a week and one price goes anywhere costs for consumers. There are numerous denials that the delivery won't be altered and the parliament would have to approve these types of changes but if they will commit to a stock offering then it would not be a stretch to think they would fully commit to changes that could make the service more profitable.

The world for postal service has changed completely thanks to the creative destruction caused by email and texting. As I asked rhetorically a couple of months ago, how many bills do you now pay online, how many magazines do you receive in the mail and when was the last time you wrote and mailed a letter?

Despite the threat of obsolescence and a reduction in parcel volume over the last few years, things have been improving recently. The Guardian reports that profits for Royal Mail were up 60% last year to 324 million British pounds which could give the stock a trailing price to earnings ratio of 9.25 based on the price talk of 3 billion British pounds for the whole company.

As a further attempt to garner public support the government is expected to commit to Royal Mail paying out generous dividends. In the first article about this story two months ago I posited that the Royal Mail could trade along the lines of a utility stock so the intention to pay are large dividend is not surprising and is consistent with other publicly traded postal services.

Deutsche Post (DPSGY:OTC) has a trailing yield of 2.8% even after rallying 24% in the last two and half months. Bpost, the postal service in Belgium came public earlier this summer and is expected to yield 7%.

If this deal is successful and other countries privatize mail services then attention will of course shift to whether the U.S. Post Office should also go public. Obviously the U.S. Post Office is bloated and it seems reasonable that there could be efficiencies gained under a private management but it is worth noting that the Royal Mail offer probably could not happen had the government not absorbed the legacy pension costs and the U.S. government would need to take expensive steps of its own to strengthen the U.S. Post Office before it could go public.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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